Liquidators, Disclaimers and Leases: the High Court Rules

The High Court of Australia handed down its decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51. This has been decision awaited with bated breath by insolvency practitioners around the land and deals with a previously confusion aspect of interpretation when it comes to the Corporations Act.

This appeal posed two statutory questions:
1. Does Div 7A (ss568 – 568F) of Pt 5.6 of the Corporations Act 2001 (Cth) (the “Act”) give the liquidator of a company power to disclaim the leases which the company granted?
2. If the Act gives that power, does disclaimer terminate the tenants’ rights arising under the lease?

Background:

Willmott Forests Limited (“WFL”) ran a forestry investment scheme under which it leased to participants in those schemes portions of land which it either owned or leased. Each lease was for a term of years, often with an option for a further term and provided that rent was to be paid either up front or on an annual basis.

In September 2010, WFL went into voluntary administration whilst receivers and managers were appointed to property within the WFL group which it had charged. Certain freehold land was not charged. In March 2011, the creditors of WFL voted to wind up it up.

The liquidators and receivers and managers sought to the sell the assets of WFL, including its freehold land and its interests as lessee of certain land. The sale was said to have been run on the basis that parties could either purchase the relevant assets unencumbered by the investment schemes or so encumbered with the ability to take over as manager of the schemes. No party sought to purchase the assets on an encumbered basis but 54 binding offers were made to acquire the assets on an encumbered basis.

Procedural History:

Having received the offers noted above, the liquidators applied to the Supreme Court of Victoria for a direction pursuant to section 511 of the Act for directions and orders about the sale process. The judge at first instance ordered separate determination of this question:

“Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?”

Justice Davies (at first instance) answered this question in the negative. The liquidators appealed and the Court of Appeal of Victoria reversed Justice Davies. The Growers’ appealed on special leave to the High Court.

Decision:

In a 4-1 decision (French CJ, Hayne, Kiefel and Gagelar JJ in the majority, Keane J in the minority) the Growers’ appeal was dismissed and the questions posed above where both answered in the affirmative.

Joint Reasons of French CJ and Hayne and Kiefel JJ:

The key points to arise from the binding joint judgment are as follows:

1. Their honours concluded that the term “Property” in section 568 (1) does not just deal with the ownership of land but that is it a “compendious” description of legal relationships amounting to ownership of objects of property (both tangible and intangible).
2. That being the case, the reference in section 568(1)(f) to “a contract” must be understood as identifying, as the disclaimer property, the rights and duties which arise under the contract.
3. The rights and duties which a landlord and tenant have under a lease are bundles of rights and duties which together can be identified as a species of property.
4. Further, the rights and duties of the landlord are a form of property; those rights and duties “consist of”, in the sense of derive from, the contract of lease.
5. That being the case, the leases to investors of which WFL was landlord were property of the company which may be disclaimed by the liquidator.
6. The effect of any disclaimer of the leases was that, because the company’s rights, interests and liabilities in respect of the leases cannot be brought to an end without bring to an end the correlative liabilities, interests and rights of the tenants, in order to release the company liability (as prescribed by section 568D(1)) it was necessary to terminate the tenants’ rights under the leases which operates to terminate the tenants’ estates or interests in the land.
7. The tenants are then left with the right to prove in the winding up as creditors for whatever damage is inflicted as a result of the disclaimer.

This case gives an important guidance to liquidator lessees and their tenants clearing up a previously uncertain area. The joint judgment notes that it has left a number of questions unanswered including:

1. Is the leave of the Court required for a disclaimer of a lease to be effective and, if so, what considerations would inform the Court’s decision as to whether to disclaim; and
2. How will the Court consider a scenario in which it is pleaded by the tenant that it has suffered gross prejudice as a result of the disclaimer (in the context of an application to set aside a disclaimer)?

The sooner these questions, for insolvency practitioners, are answered the better.

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